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Trust Decanting (Portfolio 871)

Tax Management Portfolio, Trust Decanting, No. 871, discusses the distribution of trust property further in trust pursuant to a trustee's power to distribute property to trust beneficiaries, commonly referred to as trust decanting.

DESCRIPTION

Tax Management Portfolio, Trust Decanting, No. 871, discusses the distribution of trust property further in trust pursuant to a trustee's power to distribute property to trust beneficiaries, commonly referred to as trust decanting. Trust decanting generally refers to the exercise of a trustee's discretionary power to distribute trust property to trust beneficiaries by distributing such property to another trust for the benefit of one or more of such beneficiaries. Although trust decanting may be authorized under common law, many states have enacted trust decanting statutes allowing a trustee to appoint trust property in favor of another trust. This portfolio examines the common law background of trust decanting, trust decanting statutes, potential uses or applications of trust decanting, and potential tax consequences of trust decanting. Examples are used to illustrate and discuss various issues. This portfolio may be cited as Culp & Bennett Mellen, 871 T.M., Trust Decanting.

AUTHORS

WILLIAM R. CULP, JR., ESQ.

William R. Culp, Jr., B.S., University of North Carolina; J.D., University of North Carolina School of Law; LL.M (Taxation), New York University School of Law; member, North Carolina Bar Association; member, Legislative Committee, Estate Planning and Fiduciary Law Section, North Carolina Bar Association; contributor to various legal publications on tax and estate planning matters and lecturer at various tax and estate planning institutes; Fellow, American College of Trusts and Estates Counsel.

BRIANI BENNETT MELLEN, ESQ.

Briani Bennett Mellen, B.A., Emory University; J.D., magna cum laude, University of South Carolina School of Law; LL.M (Taxation), New York University School of Law; member, South Carolina Bar Association; member, North Carolina Bar Association; contributor to various legal publications on estate planning matters and lecturer at various tax and estate planning institutes.

TABLE OF CONTENTS

Portfolio 871-1st: Trust Decanting

Portfolio Description

Authors

Technical Advisors

Description

Detailed Analysis

I. Introduction

A. General Definition

B. Rationale Supporting Decanting

C. History of Decanting

II. Decanting Under Common Law

A. Generally

B. Restatement of Property

1. Restatement (First) of Property

2. Restatement (Second) of Property: Donative Transfers

a. Description of a Power of Appointment

b. Trustee's Discretionary Power to Distribute as a Power of Appointment

c. Power to Transfer in Further Trust

3. Restatement (Third) of Property: Wills and Other Donative Transfers

a. Definition of a Power of Appointment

b. Power of Appointment Held in Nonfiduciary Capacity

c. Exercise of Special Power by Appointing Property in Trust

d. Creation of a New Power in Another

4. Restatement (Third) of Trusts

C. Case Law

1. Phipps v. Palm Beach Trust Co.

2. In re Estate of Spencer

3. Wiedenmayer v. Johnson

4. Lahti v. Comr.

5. Two-Step Decanting Under State Law: Division and Merger of Trusts

III. State Decanting Statutes

A. In General

B. Statutory Requirements for Decanting

1. Trustee's Discretionary Authority to Invade Trust Assets

a. Absolute Power to Distribute Property

b. Discretionary Power to Distribute Property

c. Fiduciary Duties Imposed on Decanting

d. Property Subject to Currently Exercisable Power of Appointment

e. Decanting by Trustee-Beneficiary

f. Fixed Interests in Trust Property

g. Powers of Appointment

h. Modifications Affecting Trustee Powers or Duties

2. Procedural Requirements and Mechanics of Decanting

3. Beneficiary Consent and Court Approval

C. Miscellaneous Rules Governing Decanting

1. Treatment as Special Power of Appointment

2. Spendthrift Provision

3. Trustee's Duty to Exercise Decanting Authority

4. No Abridgement of Rights Under Trust Instrument or Common Law

5. Acceleration of Beneficial Interests in Trust

D. Interpretive Case Law

IV. Tax Treatment of Decanting

Introductory Material

A. Generation-Skipping Transfer Tax

1. Decanting from Grandfathered Trusts

a. Pre-2000 PLRs — The “No Change” Test

b. Regulatory Safe Harbors

c. Failure to Satisfy Regulatory Safe Harbors

d. Exercise of a Special Power of Appointment

e. Trust Decanting Not Treated as Exercise of Special Power of Appointment

f. The Discretionary Distribution Safe Harbor

(1) Requirements in General

(2) Decanting Authorized When Trust Became Irrevocable

(3) Beneficiary Consent or Court Approval

(4) Change in Administrative Provisions

(5) Shift of Beneficial Interests

(6) Modifying the Trust Term Under the Discretionary Distribution Safe Harbor

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